Hostname: page-component-586b7cd67f-tf8b9 Total loading time: 0 Render date: 2024-11-22T09:47:35.806Z Has data issue: false hasContentIssue false
  • English
  • Français

USER COSTS, THE FINANCIAL FIRM, AND MONETARY AND REGULATORY POLICY

Published online by Cambridge University Press:  22 February 2019

Maksim Isakin  and
Apostolos Serletis
Maksim Isakin
Affiliation:
Cleveland State University
Apostolos Serletis*
Affiliation:
University of Calgary
*
Address correspondence to: Apostolos Serletis, Department of Economics, University of Calgary, Calgary, Alberta, T2N 1N4, Canada. e-mail: [email protected]. Phone: (403) 220-4092. Fax: (403) 282-5262.
Get access Rights & Permissions [Opens in a new window]

Abstract

We investigate how key monetary policy instruments and financial regulation affect the banking firm. We take the user-cost approach to the construction of prices for financial services and use quarterly data on the U.S. commercial banking sector, over the period from 1992 to 2016, obtained from the Federal Deposit Insurance Corporation. We use the symmetric generalized Barnett variable profit function to derive demands for and supplies of monetary and nonmonetary goods and provide evidence consistent with neoclassical microeconomic theory. We find that the compensated price elasticities of banking technology are small in magnitude. Yet a hypothetical policy experiment shows that even small changes in the holding costs of financial goods can result in significant changes in user costs and the quantities demanded and supplied.

Keywords

Commercial BanksGeneralized Barnett Variable Profit FunctionFlexible Functional Forms
Type
Articles
Information
Macroeconomic Dynamics , Volume 24 , Issue 6 , September 2020 , pp. 1547 - 1573
Copyright
© 2019 Cambridge University Press

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Adrian, T. and Shin, H. S. (2011) Financial intermediaries and monetary economics. In: Friedman, B.M., and Woodford, M. (eds.), Handbook of Monetary Economics (Vol. 3A), pp. 601–650. Amsterdam: North-Holland.Google Scholar
Barnett, W. A. (1976) Maximum likelihood and iterated Aitken estimation of nonlinear systems of equations. Journal of the American Statistical Association 71, 354–360.CrossRefGoogle Scholar
Barnett, W. A. (1978) The user cost of money. Economics Letters 1, 145–149.CrossRefGoogle Scholar
Barnett, W. A. (1983) New indices of money supply and the flexible Laurent demand system. Journal of Business and Economic Statistics 1, 7–23.Google Scholar
Barnett, W. A. (1987) The microeconomic theory of monetary aggregation. In Barnett, W. A. and Singleton, K. (eds.), New Approaches to Monetary Economics, pp. 115–168. Cambridge, UK: Cambridge University Press.10.1017/CBO9780511759628.007CrossRefGoogle Scholar
Barnett, W. A. (2002) Tastes and technology: Curvature is not sufficient for regularity. Journal of Econometrics 108, 199–202.10.1016/S0304-4076(01)00131-2CrossRefGoogle Scholar
Barnett, W. A. (2012) Getting it Wrong: How Faulty Monetary Statistics Undermine the Fed, the Financial System, and the Economy. Cambridge, MA: The MIT Press.Google Scholar
Barnett, W. A. and Hahm, J. H. (1994) Financial-firm production of monetary services: A generalized symmetric Barnett variable-profit-function approach. Journal of Business and Economic Statistics 12, 33–46.Google Scholar
Barnett, W. A., Kirova, M. and Pasupathy, M. (1995) Estimating policy-invariant deep parameters in the financial sector when risk and growth matter. Journal of Money, Credit, and Banking 27, 1402–1430.10.2307/2078059CrossRefGoogle Scholar
Barnett, W. A. and Zhou, G. (1994) Financial-firms’ production and supply-side monetary aggregation under dynamic uncertainty. Federal Reserve Bank of St. Louis Review 76, 133–165.Google Scholar
Basu, S., Inklaar, R. and Wang, C. (2011) The value of risk: Measuring the service output of U.S. commercial banks. Economic Inquiry 49, 226–245.CrossRefGoogle Scholar
Basu, S. and Wang, J. C. (2013) Technological Progress, the “User Cost of Money,” and the Real Output of Banks. Working paper: No. 13–21.Google Scholar
Berger, A. N. and Humphrey, D. B. (1992) Measurement and efficiency issues in commercial banking. In: Griliches, Z. (ed.), Output Measurement in the Service Sectors, pp. 245–300. Chicago: University of Chicago Press.Google Scholar
Berger, A. N. and Mester, L. J. (2003) Explaining the dramatic changes in performance of US banks: Technological change, deregulation, and dynamic changes in competition. Journal of Financial Intermediation 12, 57–95.10.1016/S1042-9573(02)00006-2CrossRefGoogle Scholar
Bolt, W. and Humphrey, D. (2012) A Frontier Measure of U.S. Banking Competition. DNB Working Paper: No. 359.Google Scholar
Bolt, W. and Humphrey, D. (2015) A frontier measure of U.S. banking competition. European Journal of Operational Research 246, 450–461.10.1016/j.ejor.2015.05.017CrossRefGoogle Scholar
Diewert, W. E. (2015) A Note on the Flexibility of the Barnett and Hahm Functional Form. Vancouver School of Economics, Working Paper: No. 2015–1.Google Scholar
Diewert, W. E., Fixler, D. and Zieschang, K. (2016) Problems with the measurement of banking services in a national accounting framework. In Hartwick, J. M. (ed.), National Accounting and Economic Growth, Chapter 6, pp. 117–176. Cheltenham, UK: Edward Elgar Publishing.Google Scholar
Diewert, W. E. and Wales, T. J. (1987) Flexible functional forms and global curvature conditions. Econometrica 55, 43–68.CrossRefGoogle Scholar
Greene, W. H. (2012) Econometric Analysis, 7th ed. Upper Saddle River: Pearson Prentice Hall.Google Scholar
Hancock, D. (1985) The financial firm: Production with monetary and nonmonetary goods. Journal of Political Economy 93, 859–880.CrossRefGoogle Scholar
Hancock, D. (1991) The Theory of Production for the Financial Firm. Boston, MA: Kluwer Academic.CrossRefGoogle Scholar
Hughes, J. P. and Mester, L. J. (1998) Bank capitalization and cost: Evidence of scale economies in risk management and signaling. The Review of Economics and Statistics 80, 314–325.10.1162/003465398557401CrossRefGoogle Scholar
Lau, L. J. (1978) Testing and imposing monotonicity, convexity, and quasi-convexity constraints. In Fuss, M. and McFadden, D. (eds.), Production Economics: A Dual Approach to Theory and Applications, Vol. 1, pp. 409–453. Amsterdam: North-Holland.Google Scholar
Mas-Colell, A., Whinston, M. D. and Green, J. R. (1995) Microeconomic Theory. Oxford: Oxford University Press.Google Scholar
Olley, G. S. and Pakes, A. (1996) The dynamics of productivity in the telecommunications equipment industry. Econometrica 64, 1263–1297.10.2307/2171831CrossRefGoogle Scholar
Sealey, C. W. Jr. and Lindley, J. T. (1977) Inputs, outputs, and a theory of production and cost at depository financial institutions. Journal of Finance 32, 1251–1266.CrossRefGoogle Scholar
Serletis, A. and Shahmoradi, S. (2005) Semi-nonparametric estimates of the demand for money in the United States. Macroeconomic Dynamics 9, 542–559.CrossRefGoogle Scholar
Serletis, A. and Shahmoradi, A. (2007) Flexible functional forms, curvature conditions, and the demand for assets. Macroeconomic Dynamics 11, 455–486.10.1017/S1365100507060154CrossRefGoogle Scholar
Wheelock, D. C. and Wilson, P. W. (2018) The evolution of scale economies in U.S. banking. Journal of Applied Econometrics 33, 16–28.CrossRefGoogle Scholar